Monday, September 13, 2010

Today is a good day to address this topic because the U.S. gapped up in part on overnight news (this weekend) from China that was (wait for it) "better than expected". I am quite bemused by all the attention to Chinese statistics - they seem to be more important to the U.S. stock market, than U.S. statistics for much of the past 18 months. Countless new Americans in poverty? Who cares - iron ore is up, so China is buying. Completely neutered housing market whenever handouts from government disappear? Doesn't matter, Chinese imports rose +1% more thane expected. Etc etc.

I am not implying China is not growing, nor has many interesting prospects nor offers much more growth the U.S.... but frankly I (nor most people) have much of an idea of what the truth is on the ground other than at the company specific level via the companies that trade on U.S. markets. But when an entire stock market (globally it seems) is waiting for China to report a figure of X and they report X+1 and we all celebrate as if the Cubbies won the World Series... well it just reinforces some of the farce that is the stock market game.

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Speaking to inflation specifically here is a solid piece by BusinessWeek. The last sentence of the story pretty much describes all you need to know.

Lydia Wang, a 28-year-old marketing manager in Shanghai, gripes that the shoes and clothing she normally buys are at least 50 percent pricier than in 2009. Wu Sengyun, a 54-year-old retiree living in the coastal city of Ningbo, Zhejiang, says prices of fruit and fish are both up more than 20 percent. Willy Lin has cut back on serving free drumsticks in the canteen of his Jiangxi clothing factory as meat and vegetable prices climb. "The workers suffer," he says. "Everybody is crying."

Officially, China's consumer price inflation topped out at 3.3 percent in July from the year before—a 21-month high. At an Aug. 12 press conference, Pan Jiancheng, a deputy director in the statistics bureau, announced that the inflationary threat was "overhyped."

Many consumers, investors, analysts, and academics disagree. "There has been a jump in prices that isn't reflected in the numbers," says Chinese Academy of Social Sciences economist Yu Yongding, who formerly served as an adviser to China's central bank. Michael Pettis, a finance professor at Peking University, wonders how a country that grew 10.3 percent last quarter and is seeing upward pressure on wages could register inflation of only a few percentage points. (I believe it's due to the influx of unicorns... and mermaids)

Another sign of rising prices: Multinationals in China expect to hike wages an average of 8.4 percent this year, according to human resources consultant Hewitt Associates (HEW). Ordinary Chinese, meanwhile don't see the steep jumps in their housing, education, and medical expenses reflected in the official stats. "Inflation could well be 6 percent now for most people in China," says Pettis.

If the doubters are right, then the government has a serious inflation problem that it either hasn't figured out how to measure or has chosen to ignore. Other vital Chinese statistics—such as retail sales and unemployment—have also been murky. (murky... a very kind word)

Unlike most countries, China refuses to release in detail how much weighting it gives different product categories when calculating inflation, a situation that World Bank senior economist Louis Kuijs calls an "oddity." (unicorns are also oddities, but as long as Chinese government officials say they are there - let's buy stocks) .

Also at issue: rising apartment and rental costs that eat up more of Chinese budgets. For 26-year-old Beijing resident Wang Yulu, the monthly rent of her 35-square-meter one-bedroom apartment has just increased more than 20 percent, to $338. Hundreds of millions of rural Chinese keep moving to urban coastal areas, pushing up rents and food prices.

The prices charged by millions of restaurants, coffee shops, and fitness centers go largely unrecorded as entrepreneurs evade taxes. A standard foot massage, popular in cities, has risen from around $10 in 2008 to about twice that today, says Zoe Wang, a 29-year-old strategy consultant from Shanghai. "Unfortunately, my salary didn't double," she says. Official figures record only a 0.4 percent rise in recreation and education costs this year. (Another oddity: China does not separate these two categories in its figures).

Says 54-year-old Beijing retiree Wei Mingxiang, as she shops in Beijing's Rundeli vegetable market: "Prices have gone up too far. My entire monthly pension of $147 is spent on food." One staple, cowpeas, recently doubled in price in two weeks to 40 cents a pound.

Others wonder whether the historic aversion of China's rulers to the political risks of inflation creates pressures to keep official figures low. Similar pressures help explain how official unemployment targets of just over 4 percent were met in 2008 and 2009, when China's factories laid off tens of millions of workers, say economists. (must be the Chinese birth death model!!)

"The government has made it quite clear" what its inflation target is for 2010, blogged Tsinghua University management professor Patrick Chovanec on Aug. 12. "A whole parade of official sources have issued statements over the past few weeks predicting—with the unruffled, enigmatic certainty one normally associates with a blackjack dealer dealing a fixed deck—that inflation will come in right at 3 percent this year."

China wants yearly inflation at 3%... hence it will be. China wants yearly GDP at 10%. Presto magic. Extrapolate to all other government figures at will... and buy stocks based on the Chinese goldilocks miracle.*

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